China’s landlords offer more than space to retailers

HONG KONG: As the most alluring consumer market in the world, thousands of foreign retailers attempt to establish a foothold in China every year. But the road to success is not easy and many fail.

To secure and retain tenants in this challenging retail market, developers of mainland shopping centres are therefore going beyond simply marketing space to provide an advisory service to their customers.

Consider the case of Japanese restaurant chain Itacho Sushi, well-known to Hong Kong customers since it has 19 outlets in the city.

Itacho Sushi has been on the expansion trail on the mainland and will open 10 restaurants in Guangzhou, Shanghai and Shenzhen this year. Last month it opened its first outlet in Beijing.

Its restaurants are situated in prime locations and in Beijing it opened in a 10,000 sq ft space in the basement of Sun Hung Kai Properties' Beijing apm on Wang Fu Jing Street, the best known shopping destination in the capital city.

"It is more complicated to open a restaurant on the mainland than in Hong Kong. There are more procedures and more government departments that you have to go through," Liang Wai-yip, the chain's operation manager, said. "We are also not familiar with issues like the local fire safety and public health ordinances."

As such, Liang said, "when we choose a shopping centre, other than such issues as location and rents, we would also consider the reputation of the landlord and whether he could help us in setting up business and doing promotions.

"It is very important to have a landlord you can regard as a partner".

For example, Liang said, their decision to use wood-like fibreboards in the interior design of the restaurant in Beijing caused concern to the local fire department, which said under existing fire regulations wood could not be used in underground spaces. "But the landlord, Sun Hung Kai Properties, helped us to explain the situation to the fire department. It managed the approval process and allowed us to open our store on time," he said.

However, the restaurant chain has had less success in Guangzhou, where it signed a lease in 2007. Three years on and the shopping centre is still being built and the date of completion remains uncertain.

In Beijing, Itacho Sushi will benefit from salaries and rents that are lower than those in Hong Kong, but aims to operate at a profit margin ranging from 25% to 30%, the same as in Hong Kong.

"Our prices will be about 10% cheaper than in Hong Kong because of a lower commodity price level on the mainland, although we will have to meet higher set-up costs because our supplies cannot be shipped from Japan directly to Beijing due to complicated quarantine procedures," Liang said.

"We will have to ship the supplies to Hong Kong and then go through a quarantine process in Guangzhou before shipping them to Beijing,"

Ada Nip, the head of retail at property consultancy DTZ in North China, says retailers who enter the mainland market for the first time often depend on landlords to help them secure licences and complete procedures to set up for business.

In fact, most developers have established teams to help strengthen relationships between tenants and local governments.

"No matter how many projects a developer might have done elsewhere, if it is new to a particular city or district, it will face difficulties and have to build relationships with the local government," Nip said.

"For example, every local government in Beijing has its own fire department and regulations. Developers who are new to the district will have to build relationships with the local government to be familiar with the regulations," she said.

Not surprisingly, retailers prefer to hire space from landlords with the most experience in the market. "They want to know whether a landlord has developed a successful mall before or not," she said.

According to a Knight Frank research, 166,000 sq m of new retail space came on to Beijing's retail market in the first quarter after the openings of Cuiwei Plaza Phase two and Beijing Hualian Wanliu Plaza.

But since the capital city has many shopping centres only a few have high shopping traffic and strong retail sales, says Nip. "We face the problem of oversupply in the leasing market. It takes time for new shopping centres to get established and for transport links to the location to improve," she said.

Knight Frank says international brands have resumed looking for space to expand in the wake of data showing that retail sales are emerging from last year's trough. – South China Morning Post

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